The euro is likely to struggle to hold gains against an oversold US dollar next week as investors await a November Federal Reserve meeting expected to produce a new round of quantitative easing. After surging 7.6 percent versus the greenback in September, the euro's rise slowed to about 2 percent in October as investors consolidated the previous month's gains.
-- Dollar index set to post first weekly gain in five weeks
-- Euro rally could stall, gains are lower so far in October
-- Technicals suggest dollar recovery underway
Uncertainty over the result of the Fed's November 2-3 meeting and a G20 finance ministers' gathering in South Korea has also led investors to reduce extremely bearish bets on the dollar. "We had a strong trend from September to around October 15 - that is selling dollars and buying euros - but that has started to slow down. We're in that period now where the market wants to find its next direction. Is the dollar going to go lower or higher?" said Greg Michalowski, chief currency strategist of the New York-based online broker FXDD.
On Friday, the dollar was on track to break a five-week losing streak against major currencies. On the week, the dollar index was up 0.6 percent, the best gain since the week of September 12. Michalowski's guess is that the dollar could rally further, a view that is slowly gaining momentum.
John Taylor, chairman and chief investment officer at currency hedge fund FX Concepts believes a peak in the euro against the dollar is just around the corner. Taylor told Reuters in an interview that he thinks the euro will most likely hit a top of between $1.43-$1.45 during the first week of November, which is when the Fed, at its November 2-3 policy meeting, may announce quantitative easing.
Many analysts say the euro zone is still riddled with problems and speculation about exiting quantitative strategies at a time when its recovery is still shaky is premature. Overall, some analysts believe the euro zone's fiscal austerity measures will in the long run derail growth in the region's peripheral countries.
EURO ZONE PERIPHERY STILL A PROBLEM "We are confident in the months ahead that the current optimism will be replaced by a grim reality in the peripheral countries," wrote Jonathan Clark, FX Concepts president, in a note to investors.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, echoed some of Taylor's views. He believes the dollar's decline against the euro is reaching its final stages. Chandler pointed out that the European Central Bank seems determined to normalise monetary policy, with the termination of its long-term repo operations and the planned end of the unlimited nature of the short-term refi transactions.
ECB Council member Juergen Stark had suggested that the ECB might raise rates before it fully exits some of the measures taken during the crisis. As a result, the derivatives market has already factored in a 25 basis-point hike in the first quarter next year.
"This seems unwarranted for an economy that the ECB expects to expand by only 1.2 percent next year, which would follow the meager 1 percent expansion projected this year," Chandler said. Technical charts also suggest a dollar recovery is underway.
FXDD's Michalowski said he is encouraged by dollar/yen's price action, which has moved away from 81.11, the intermediate floor of the last few days. Mid-afternoon in New York, the dollar is up 0.2 percent at 81.43 yen. The next target would be getting above the week's high near 82 yen and after that, 82.87 yen is in play, the level at which Japan intervened to weaken its currency more than a month ago.
In the case of euro/dollar, the five-day and 20-day simple moving averages seemed set to converge in the next few days, which is a bearish signal, Brown Brothers' Chandler said. That technical indicator had accurately captured the market's big moves the last six months, identifying the euro's downtrend from mid-April through mid-June and its recovery through mid-August, including its latest bullish turn in mid-September.